Congress Gives Small Employer HRAs the Green Light

28 December 2016
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2017 green light alert! Congress has approved the 21st Century Cures Act, a provision allowing small employers to reimburse their employees for medical expenses under a health reimbursement arrangement (without being liable for the draconian, $100 per day penalty for violating the Affordable Care Act’s rules).

Background: Stand-alone HRAs do not meet two key requirements of the ACA, as they:

  • Limit the dollar amount of the insured person’s annual benefits and
  • Fail to provide certain preventive-care services without requiring cost-sharing.

As a result, under the IRS’ interpretation of the ACA, employers are subject to a $100 per day (maximum $36,500 per year) excise tax penalty per employee.

New Law: Effective January 1, 2017, under the 21st Century Cures Act, qualified small employers that have an average of fewer than 50 full-time employees (including full-time-equivalent employees) and that maintain a qualified small-employer HRA will be exempt from the penalty. Under this act, a qualified small employer is one that:

  • Employs an average of fewer than 50 full-time employees (including full-time-equivalent employees) and does not offer a group health plan to its employees. The number of full-time-equivalent employees is determined by adding up all the hours that part-time employees worked in a given month and dividing by 120.
  • Provides the HRA on the same terms to all eligible employees. Eligible employees all those except:
    1. Those who have not completed 90 days of service,
    2. Those who have not attained the age of 25,
    3. Part-time workers (generally those working an average of less than 30 hours per week),
    4. Seasonal workers (generally those employed for 6 months or fewer during the year),
    5. Those covered by a collective bargaining unit, and
    6. Certain nonresident aliens.
  • Entirely funds the HRA (i.e., no salary-reduction contribution is made to the HRA).
  • Only reimburses the employees after being provided with proof of their medical expenses.
  • Limits reimbursements to $4,950 ($10,000 where the plan includes family members) per year. Amounts are subject to inflation adjustments for years after 2016.

Any medical-expense reimbursements that an employee receives from a qualifying HRA are excluded from that employee’s income.

If you have questions regarding this new topic effective January 1, 2017, please give Dagley & Co. a call at 202-417-6640.





Image via public domain